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Sonoco (SON) Earnings Miss Estimates in Q2, Improve Y/Y

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Sonoco Products Company SON reported adjusted earnings of 84 cents in second-quarter 2021, which missed the Zacks Consensus Estimate of 87 cents but was in-line with the company’s guidance of 82-88 cents. The bottom line, however, improved 6% from the prior-year quarter aided by benefits from volume/mix growth and productivity improvements, which were somewhat offset by a negative price/cost relationship and the impact from the divestiture of the company’s former display and packaging businesses.

Including one-time items, the company reported a loss per share of $3.34 against the year-ago quarter’s earnings of 55 cents.

Sonoco’s net sales were $1.38 billion, which beat the Zacks Consensus Estimate of $1.32 billion. The top line grew 11% on a year-over-year basis, courtesy of an 8% improvement in volume/mix, solid demand recovery in most of the industrial-related businesses, higher selling prices to combat inflation and accretion from the Can Packaging acquisition. The disposition of the company's European and U.S. display and packaging contract businesses in November 2020 and April 2021 had a dampening impact.

Sonoco Products Company Price, Consensus and EPS Surprise

Sonoco Products Company Price, Consensus and EPS Surprise
Sonoco Products Company Price, Consensus and EPS Surprise

Sonoco Products Company price-consensus-eps-surprise-chart | Sonoco Products Company Quote

Operational Update

Cost of sales was $1,120 million, 12% higher than the year-earlier quarter’s $998 million. Gross profit during the reported quarter totaled $263 million, up 6% year over year. Gross margin came in at 19%, indicating a contraction of 90 basis points year over year.

Selling, general and administrative expenses amounted to $129 million, up 6% year over year. This was driven by a return to more normalized expenses for medical benefits and management incentives. Adjusted operating income edged up 1.6% year over year to $128.6 million during the reported quarter. Operating margin came in at 9.3% lower than the year-ago quarter’s 10.2%.

Segment Performance

The Consumer Packaging segment’s net sales were up 4% year over year to $598 million. Higher selling prices implemented to help offset inflation, acquisition sales from Can Packaging and a positive impact from foreign exchange more than offset an approximate 2% decrease in volume/mix. Operating profit amounted to $60 million, reflecting a decline of 29% from prior-year quarter due to a negative price/cost relationship stemming from escalating resin, film, metals, packaging and freight costs, which offset productivity improvements and profits from the Can Packaging acquisition.

Net sales in the Industrial Paper Packaging segment totaled $609 million, reflecting year-over year growth of 34% on higher selling prices and improved volume/mix and demand. Operating profit totaled $58 million, reflecting a 74% year-over-year improvement, on positive volume/mix and strong productivity improvements.

Sales for the All Other segment, which comprises protective, healthcare, retail and industrial plastics units, dropped 19% year over year to $176 million. The decline was primarily due to the disposition of the display and packaging businesses. However, the segment reported a 23% year-over-year improvement in operating profit to $11 million owing to the volume/mix gains and strong productivity. This was partially offset by a negative price/cost relationship stemming from higher resin-based raw material costs and the impact from the divested display and packaging businesses.

Financial Performance

Sonoco reported cash and cash equivalents of $263 million at the end of second-quarter 2021 compared with $565 million at the end of 2020. The company generated cash flow from operating activities of around $102 million during the first six months of 2021 compared with $282 in the prior-year comparable period. Free cash flow was $9.4 million in the first six-month period of 2021, which included pension contributions totaling $133 million made in the second quarter as part of the final settlement of the Inactive Plan's liabilities. The company had generated free cash flow of $210 million in the first six-months of 2020.

As of Jul 4, 2021, total debt was $1.60 billion, compared with $1.70 billion as of Dec 31, 2020. At the end of second-quarter 2021, Sonoco’s total debt to total capital was 46.7% compared with 47.1% at the end of 2020.

Guidance

Sonoco projects second-quarter 2021 adjusted earnings per share between 87 cents and 93 cents compared with earnings of 86 cents reported in third-quarter 2020.

For 2021, the company maintained its adjusted earnings per share guidance at $3.50-$3.60. In 2020, it reported adjusted earnings per share of $3.41. The guidance is based on the assumption that global business activity will continue to improve on government stimulus measures and global vaccination efforts. However, the company cautioned that raw material and non-material cost inflation, and the impact of the COVID-19 pandemic on global supply chains remain headwinds. Sonoco has been aggressively trying to drive productivity, control costs and implement price hikes to negate these impacts.

In the consumer-related businesses, Sonoco expects volumes to remain above pre-pandemic levels despite more normalized demand for food packaging as consumers moderate at-home eating patterns. It anticipates the COVID-impacted markets, such as confectionery, food service and construction products to continue on the path to recovery. Backed by the historically high backlogs for uncoated recycled paperboard in the United States and Canada and with demand for global tubes, cores and cones returning to pre-pandemic levels, the company anticipates the industrial-served markets to gain steam.

Price Performance

The company’s shares have gained 16.5% in the past year compared with the industry’s rally of 23.3%.

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Zacks Rank and Stocks to Consider

Sonoco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include Greif, Inc. GEF, Pentair plc PNR and Lindsay Corporation LNN. While Greif and Pentair sport a Zacks Rank #1 (Strong Buy), Lindsay at present carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Greif has an anticipated earnings growth rate of 47.2% for fiscal 2021. The company’s shares have gained around 56% in a year’s time.

Pentair has a projected earnings growth rate of 26% for the current year. The stock has appreciated around 61% in the past year.

Lindsay has an estimated earnings growth rate of 1% for the ongoing fiscal year. In a year’s time the company’s shares have rallied 54%.


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